In Gulf of Mexico, offshore oil industry regains footing

March 19, 2014

By: James Osborne, DallasNews.com

HOUSTON — Four years after the world watched more than 200 million gallons of oil gush from a damaged well about a mile beneath the surface of the Gulf of Mexico, the offshore drilling industry here is experiencing a rebirth.

There are more active drilling rigs in the Gulf of Mexico now than there were before BP’s Deepwater Horizon spill. Major oil companies like Exxon Mobil, Chevron — even BP — are spending billions of dollars developing deep-water fields that are projected to almost double the flow of oil over the next decade.

“We’re projecting out to 2020, and our clients are saying as long as we have $80, $90 oil, it’s full steam ahead,” said Kevin Wetherington, vice president for the Gulf of Mexico at Baker Hughes, one of the world’s largest offshore drilling contractors. “These are some very productive reserves they’re looking to tap into.”

The rise in drilling activity represents a historic turnaround for an industry that, just after the spill, was brought to a standstill.

A month after the accident in BP’s Macondo field,the White House ordered a six-month moratorium on drilling projects at depths greater than 500 feet, giving the government time to assess the industry’s ability to respond to spills far below the ocean’s surface. By October 2010, there were only around 10 deep-water rigs operating in the gulf, a quarter of what was in place just six months earlier, according to the federal Bureau of Safety and Environmental Enforcement.

The impact can still be seen today. There are now close to 60 deep-water drilling rigs operating in the gulf. But production across the region remains almost 20 percent below what it was when the moratorium began.

But the rapid development of deeper oil fields more than a milebelow the surface is changing that, said Leta Smith, director of upstream oil and gas research at the information services firm IHS. IHS is predicting the deep-water gulf will soon surpass its peak production level of 1.2 million barrels a day, set in 2009. By 2025, it projects production to be close to 2 million barrels a day.

“There were a bunch of projects due to come onstream, which were delayed because of Macondo. Now we’re just getting back to where we should have been,” Smith said.

But it’s a vastly different gulf to which drilling crews have returned.

Stricter safety rules

In the years since the spill, the federal government has put in place stricter requirements on safety equipment like blowout preventers and on the readiness of spill response teams. In the event of another accident, such measures may avoid a repeat of the 87 days it took BP to cap the Macondo well, allowing oil to spread across the gulf.

Also, regulators are forcing companies to take a more systemic approach to drilling safety, like that in the North Sea. Instead of simply following a set of rules, companies will be required to develop drilling plans that prove they took approriate steps to avoid blowouts like Deepwater Horizon. And those plans must be signed off on by a third-party consultant.

“You had tremendous incentives to go deeper and develop these new technologies to drill in these really high-pressure environments,” said Donald Boesch, president of the University of Maryland Center for Environmental Science. He sat on a commission assembled by the White House to study Deepwater.

“But there wasn’t a co-evolution of safety. It was a secondary consideration.”

And costs in the offshore gulf have increased dramatically over the last five years. The regulations since Deepwater Horizon require more expensive equipment and have extended drilling periods on some deep-water wells to nine months, roughly 30 percent longer, Wetherington said.

Increased demand in the gulf and other offshore areas has driven up the rates on the advanced drilling rigs needed for deep-water jobs to more than $500,000 a day.

“It takes a long time to bring production online, especially in the deep water,” said David Emmons, a partner with the law firm Baker Botts. “After Macondo, the costs got much more expensive. And the permitting process got a lot longer.”

But that has done little to slow the majors, which have struggled to find profit in the U.S. shale drilling boom that has elevated smaller companies like Irving-based Pioneer Natural Resources and Houston-based EOG Resources.

Majors go fishing

For years a small presence in the gulf, Exxon Mobil is now pursuing what is believed to be one of the largest deposits in the deep-water area, the Julia field. At a depth of more than 30,000 feet — far below the ocean floor — Exxon is spending $4 billion, with production set to begin in 2016.

Since 2010, BP, traditionally one of the largest producers in the Gulf of Mexico, has shrunk its global operations as it works to regain investor confidence and pay off legal claims from the spill. But BP continues to focus on its deep-water fields in the gulf, with a company-record 10 rigs operating there now, a BP spokesman said.

That activity is likely to increase after the announcement last week that the Environmental Protection Agency is lifting a 2012 ban on BP pursuing new leases in the gulf.

Likewise, Chevron has its Jack/St. Malo and Big Foot fields coming online this year and next. They are projected to eventually produce almost 170,000 barrels of oil a day — on par with daily oil production in Wyoming last year.

Analysts are projecting oil prices will drop close to $80 by the end of next year as large quantities of crude come online. That could put a dent in the domestic hydraulic fracturing boom, in which operators must constantly drill new wells to keep up with rapid declines in productivity.

But the same impact is not expected in the Gulf of Mexico.

With billions of dollars invested and steadier productivity from deep gulf wells, the oil companies have committed themselves for the long term, Baker Hughes’ Wetherington said.

“It’s not going to be as sensitive to short-term fluctuations because of these long-term horizons,” he said. “A well in the deep water could be producing for 20 years.”

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